BYD: THIS IS NOT YOUR FATHER’S IP

BYD pulls the trigger on a very accretive acquisition.

Could this be the deal that finally gets this stock its due? Numbers were already going higher but BYD is adding a huge amount of EPS and cash flow without adding to leverage. The acquisition of Peninsula Gaming is a big positive on many fronts with limited downside. Shocking, really, that there was this good of a deal out there.

Here is what we like:

Huge accretion: There are a lot of unknowns (borrowing rate and allocation of excess purchase price to goodwill) but we estimate the deal could be accretive to BYD’s 2013 EPS to the tune of $0.30-0.40 or 50-70%. On a free cash flow basis, we calculate accretion of around $0.90-1.00 per share or 30-33% accretion. As a percent of normalized free cash flow (BYD is under-spending on maintenance capex for a few years), the accretion climbs to 50-55%. Maybe it’s not management hyperbole when they call the acquisition “a transformative transaction”.

Acquiring stable cash flow: All four of Peninsula’s mature properties have been generating stable EBITDA. Moreover, gaming revenues at each property have been up since January and market shares are all on a stable to upward trend (see charts below).

Protected markets: While there is always potential for new competition, there are no new properties anywhere on the horizon that could materially impact any of the Peninsula properties.

Acquiring growthy cash flow: Kansas Star, the new property in the portfolio, significantly exceeded expectations in its first full quarter of operations, generating almost $27 million in EBITDA. That’s a 60% annualized ROI on a temporary facility. The permanent facility (Phase II) will open in January 2013 at a cost of $83 million (funded by Peninsula and not BYD) which could add another $10-20 million in EBITDA.

Assets are in good shape: The properties in the aggregate are newer than BYD’s existing properties so there are no deferred capex issues.

Financing: We don’t calculate any increase to BYD’s leverage as a result of this deal. Moreover, setting Peninsula as a subsidiary and putting the debt on the sub provides BYD with a lot of financial flexibility (read: Borgata). That flexibility is probably worth the additional interest cost of subsidiary financing. Nice risk management move by BYD management. They also secured a $144 million seller financed note with no interest in the first year. Look for BYD to buy this out after year 1 or 2.

The not as good (there’s not much not to like):

Potential for an equity raise: Management didn’t rule out raising equity to fund the $200 million cash piece of the acquisition. With the stock where it is, we would not like to see dilution.

Little in the way of synergies: While this is not a huge issue since the price is right, we don’t see any cost cutting opportunities and are not optimistic that B-Connected will provide a lot of revenue synergies.

Expensive Earn-out provision: 7.5x EBITDA exceeding $105 million in 2015 at Kansas Star. This takes away a lot of the upside but it is understandable given the growth trajectory of the property.

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